The man who helped John Paulson pull off one of the greatest trades of this decade is leaving his side.

Paolo Pellegrini, who played a crucial role in helping to implement bets against sub-prime mortgages that netted Paulson & Co about $15bn (€11bn) in 2007, resigned from the $36bn hedge fund firm December 31.

While Paulson is the visionary within the firm who drives its general direction, Pellegrini and a few others helped find the riskiest sub-prime-mortgage securities to bet against, and figured out the best way to capitalize on their expected falls in value.

Pellegrini put together data showing that even stabilizing home prices would lead to huge losses in the sub-prime market, a possibility that other investors scoffed at when the trades were made in 2005 and 2006.

Pellegrini, who had a background in derivatives before joining Paulson in 2004, helped his boss use credit-default swaps, or insurance-like contracts that provided protection against various slices of mortgage-backed securities.

The move paid off when the housing market began to crumble in early 2007.

A former banker and native of Italy, Pellegrini, 52 years old, was the co-portfolio manager of the two Paulson Credit Opportunities funds, along with Paulson.

The departure is a loss for Paulson, but the firm boasts a team of senior analysts and hasn't lost other professionals on its investment team in the past year.

Paulson's two credit funds rose about 15% in 2008 through the middle of December. Other Paulson funds rose between 7% and 38% in that period, thanks to wagers against financial firms and general cautiousness about the economy.

By contrast, the average hedge fund lost more than 20% for 2008, while the Standard & Poor's 500-stock index lost 38%, including dividends.

In recent weeks, Paulson has been one of the few buyers of top-rated mortgage-backed securities, a move that is paying off as credit markets have rallied.

He also is part of a team of investors that have reached an agreement to purchase IndyMac Bank, which last year became one of the biggest bank failures in US history. Some investors who were outbid for IndyMac say the deal will bring profits to Paulson and the other victors in the competition.

But Paulson's original focus, the merger-arbitrage world, has proven trickier lately.

Paulson was, according to public filings, the largest holder of Rohm & Haas as of September 30; the company tumbled last week on worries about an acquisition. It also held 5.5 million shares of telecom-provider BCE, which has fallen, too. It isn't clear whether Paulson still holds shares or how much of any positions were hedged. A spokesman declined to comment.

-- Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
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